March 30, 2018

Regulators tackle host of issues in annual two-day gathering

The nearly 70 regulators from 36 states on hand at this week’s State Regulators National Meeting in Washington covered a host of issues over the span of Monday and Tuesday – including cryptocurrencies, marijuana business banking, cybersecurity, small-dollar loans, and much more.

In addition to the meeting topics and presentations, the event offers the state regulators a forum where they can share ideas, discuss common issues, and uncover trends, according to NASCUS President and CEO Lucy Ito. “This was our third year of hosting this event, which is quickly becoming a favorite among our regulator members,” Ito said. “We aim to make judicious use of their time and resources with a program that is packed with substance and offers plenty of time for discussion and exchange of ideas. The state system benefits greatly from this gathering each year from the sharing of information and generation of ideas among the state supervisors. We are already looking forward to 2019.”

State regulators will gather again this year -- this time in conjunction with state-chartered credit union leaders -- at the NASCUS State System Summit in Orlando, Fla., July 16-19.

COURT FINDS NCUA EXCEEDED AUTHORITY IN TWO AREAS OF FOM RULES

A federal court has vacated and set aside two provisions in NCUA’s new field of membership rules affecting the definition of local community and the population limits for rural districts, in a decision handed down Thursday.

The U.S. District Court for the District of Columbia said the agency exceeded its statutory authority in its decision over a lawsuit brought by the American Bankers Association (ABA) against the agency’s 2016 field of membership rules.

Specifically, the provisions vacated are: one that automatically qualifies a Combined Statistical Area (CSA), or a contiguous portion thereof, with fewer than 2.5 million people to be a local community; the other, increasing to 1 million persons the population limit for rural districts.

But the court upheld two other areas in the rule challenged by the bankers: ability of credit unions to serve adjacent geographic areas, and allowing credit unions to serve areas in Core-Based Statistical Areas that do not include the core.

The court essentially gave both sides – ABA and the federal regulator – wins and losses in the dispute. The bankers had sued the agency over its membership rules, which it adopted in late 2016, claiming that the rule disregarded Congress' “explicit instruction that community credit unions serve only a single, well-defined local community.” They added that the rule, instead, “declares that large regions including millions of residents and cutting across multiple states are single 'local' communities." The banker group suggested that the rule goes "well beyond congressional limits."

Now-NCUA Board Chairman J. Mark McWatters said in 2016, before the rule was issued, that he had examined the Federal Credit Union Act and the requirements of the Administrative Procedure Act (APA), and found the new rule to be within the agency’s powers, based on his own legal experience. The court, however, disagreed.

NCUA POSTS DIRECTIONS FOR CALCULATING EQUITY DISTRIBUTION

Calculating and recording the distribution of nearly $736 million in equity from the federal insurance fund for credit unions is the aim of a new online resource offered NCUA this week. The agency said it has posted on its website a preliminary pro rata calculation figure and instructions for recording the distribution. The two items are included in new “frequently asked questions” (FAQs) about the equity distribution, also posted on the website.

“The pro rata calculation figure is subject to change, and the NCUA assumes no responsibility for an eligible credit union’s accounting estimate of its Share Insurance Fund equity distribution,” the agency stated in a release.

Last fall, the agency’s board voted to close the Temporary Corporate Credit Union Stabilization Fund (TCCUSF), a fund set up to resolve troubled “corporate” credit unions affected by the economic turndown in the late 2000s. Last month, the board authorized to eligible credit unions the equity distribution (that is, the funds remaining in the insurance fund after reserve requirements were met). The funds are expected to be paid out in the third quarter of 2018.

PAIR OF LEGAL OPINIONS ISSUED: ON FOM, RELIGIOUS GROUPS …

A federal credit union chartered to serve certain religious groups (such as Anabaptists and Mennonites) is also permitted under the Federal Credit Union (FCU) Act to serve “individuals who share a core doctrinal belief and set of practices with those communities,” NCUA said in a legal opinion letter issued March 9.

“The Anabaptist concept of Christian stewardship is a distinctive aspect of Anabaptism (of which the Mennonites are one denomination) that requires practitioners to ‘live simply, practice mutual aid with the church, uphold economic justice, and give generously and cheerfully,’” NCUA General Counsel Michael J. McKenna wrote in the letter. “Individuals who share this core doctrinal belief have a significant and meaningful affinity with other members of the Anabaptist tradition, and we believe that such an FOM [field of membership] is a valid associational common bond.”

The FCU Act requires that membership in a credit union be based on a “common bond;” among the types of common bond allowed is an associational common bond. McKenna noted that religious organizations, including churches or groups of related churches, “are recognized associations within the meaning of the FOM rules and are automatically approved as satisfying the associational common bond requirements of the FCU Act.”

… AND ON TRANSACTIONS IN LOAN PARTICIPATIONS

Provisions of a loan participation transaction at a credit union must meet regulatory requirements throughout the life of the loan, and each loan must be treated independently, according to another legal opinion letter issued by NCUA, this one dated March 22.

In its letter, NCUA’s McKenna wrote that certain provisions of the agency’s loan participation regulation outline the lifetime requirements for transactions. He pointed to Sec. 701.22(d) of the regulation which “emphasizes the need for adequate documentation and due diligence from before the time of purchase throughout the life of the loan.”

Regarding “independent treatment” of loans (that is, each participated loan be identified and treated independently of all other participated loans), McKenna noted that NCUA rules require that the loan participation agreement identify each participated loan, enumerate servicing responsibilities for the loan, and include disclosure requirements regarding the ongoing financial condition of that loan, the borrower, and the servicer. Under a participation agreement with multiple loans, he wrote, documentation can be simply an addendum or schedule for identifying each loan and the participant’s interest in the loan.

However, the NCUA’s loan participation regulation does not prohibit more efficient servicing practices, the letter states. “For example, netting payments across multiple performing loans generally is considered permissible if there is proper accounting of each loan’s individual status and the netting is in accordance with the loan participation agreement,” McKenna wrote

IG CITES WEAKNESSES IN AGENCY’S RECORDS MANAGEMENT PROGRAM

Several weaknesses in NCUA’s records management program were identified – including that no comprehensive program is in place – following a management audit by the agency’s Inspector General, according to a report published earlier this month.

The audit, according to the report, shows no comprehensive records management program (including management framework, retention, and disposal system) is in place, and that the agency needs to “correct weaknesses.” The audit also found that the depth and scope of the issues identified are due in large part to agency management’s competing priorities. In addition, the report states, the audit showed that those charged with governance over records management for the agency did not consistently follow applicable laws, regulations, and guidance to ensure the agency had a comprehensive records management program in place. The report makes five recommendations, all of which were agreed to by management.

The IG also issued a report on the agency’s charge card program, which identified no serious issues, but noted annual reviews of the program will continue.

In its report, the Government Accountability Office (GAO) said the current U.S. financial regulatory structure poses challenges to “fintech firms” (or financial technology companies – those providing financial services through means of new or advanced technology), based on interviews with principals in the firms, as well as trade groups and regulators. NASCUS provided input to the study on behalf of state regulators.

“With numerous regulators, fintech firms noted that identifying the applicable laws and how their activities will be regulated can be difficult,” GAO stated in its report, Financial Technology: Additional Steps by Regulators Could Better Protect Consumers and Aid Regulatory Oversight.

“Although regulators have issued some guidance, fintech payment and lending firms say complying with fragmented state requirements is costly and time-consuming,” GAO reported. “Regulators are collaborating in various ways, including engaging in discussions on financial protections for customers that may experience harm when their accounts are aggregated by a fintech firm and unauthorized transactions occur. Market participants disagree over reimbursement for such consumers, and key regulators are reluctant to act prematurely.”

The congressional watchdog stated that regulators could act collaboratively to better ensure that consumers avoid financial harm and continue to benefit from these services, given their mandated consumer protection missions.

As a result, GAO said it has identified leading practices for interagency collaboration, including defining agency roles and responsibilities and defining outcomes. “Implementing these practices could increase the effectiveness of regulators’ efforts to help resolve this conflict,” GAO stated.

‘GUIDANCE EFFECTIVENESS’ IS 10TH REQUEST FOR INFO FROM CFPB

“Guidance and implementation” support is the tenth in the series of “requests for information” (RFI) from the federal consumer financial protection agency, seeking input on effectiveness of the guidance it provides about its regulations and actions. Comments will be due in 90 days.

In a release Wednesday, the Consumer Financial Protection Bureau (CFPB) said the RFI (one of 12 scheduled to be issued in what CFPB Acting Director Mick Mulvaney has termed a “call for evidence” to determine if the agency is fulfilling its job), is aimed at helping the bureau gather more information about the efficacy of its guidance materials and activities, including implementation support.

“The Bureau is also considering whether it would be appropriate to make changes to the formats, processes, and delivery methods for providing this guidance,” the agency stated. “And it is considering whether it would be appropriate to make changes to the disclaimers used on certain forms of guidance.”

Following this RFI, the bureau intends to issue two more: next week, on consumer education; the following week, on consumer inquiries.

All of the RFIs issued to date have had comment periods of 90 days (the first several issued by the bureau had their comments-due dates extended, by 30 days, to make the periods consistent across the information requests).

‘EXERCISE TEMPLATE’ HELPS CUS DETERMINE CYBERSECURITY STRENGTH

Credit unions – especially smaller and mid-sized ones –have access to a mechanism for determining their cybersecurity resiliency, based on a new “template” released recently by the Treasury Department’s office for overseeing cybersecurity among financial institutions. Under an “exercise template” issued by Treasury’s Financial and Banking Information Infrastructure Committee (FBIIC, which includes NASCUS), credit unions and other institutions may test their internal response and recovery processes as well as their external coordination strategy (government, other members of industry). According to FBIIC, the exercise is scenario-based, can be modified to fit the needs of specific entities, and is voluntary. Discussion questions are provided in the template, which are designed to help institutions understand their cybersecurity risks and the response processes in place to address a significant cybersecurity incident.

The legal battle over who is the acting director of the CFPB is scheduled to return to court April 12 when a three-judge panel from the U.S. Court of Appeals for the D.C. Circuit hears an appeal from bureau Deputy Director Leandra English. English claims that she, and not sitting Acting Director Mick Mulvaney (appointed by President Donald Trump) is the rightful leader for the consumer agency. English’s appeal hinges on her appointment as deputy director by previous Director Richard Cordray … NASCUS welcomes its latest member, Vizo Financial Corporate CU of Greensboro, N.C. Vizo Financial serves more than 1,200 credit unions, leagues and credit union service organizations (CUSOs) in 46 states and Canada … Here’s to a happy Easter or Passover observance to all over the coming weekend!